Dodd Frank Act

Dodd-Frank Act

Definition

An act known formally as the "Dodd-Frank Wall Street Reform and Protection
Act" (Dodd-Frank). This 2010 law made dramatic, sweeping changes to the
nation's financial regulatory system. It was enacted to make the U.S.
financial system more transparent and accountable and to prevent the type of
financial crisis that occurred during 2008.

Three specific provisions within Dodd-Frank are likely to increase the nature
and scope of legal liability faced by corporate directors and officers. These
include: (1) the "clawback" provision, (2) the whistle-blower
provision, and (3) the "say-on-pay" provision.

Related Terms

A key provision within the Dodd-Frank Act that requires publicly held companies
to submit executive compensation plans to nonbinding, advisory votes by
shareholders every 3 years. However, given the purely advisory nature of such
requirements, companies are not required to modify their compensation packages
based on shareholder votes. Moreover, companies that choose to disregard
shareholder feedback can do so with virtual impunity because the law does not
specify any penalties if companies reject such votes.

Since enactment of the "say-on-pay" provision, only a small
percentage of "no" votes by shareholders have been recorded. And even
among companies that failed to engender changes in executive compensation
packages (in response to "no" votes), meaningful consequences from a
liability standpoint have not arisen. One tactic adopted by plaintiffs'
attorneys is to bring lawsuits even before say-on-pay votes are actually held.
Instead of challenging the size of executive compensation packages, these suits
allege that firms failed to provide shareholders with adequate information on
which they can cast informed votes regarding executive pay packages.

A provision within the Dodd-Frank Act allowing companies to recover (i.e., "claw back") monies paid to current and former directors and officers under incentive compensation plans. Such repayments are required under the law if a subsequent financial restatement eliminates the basis for these incentive payments. For example, assume a company must issue a financial restatement that states lower earnings than were initially reported. If, under the company's incentive compensation plan, bonuses were paid as a result of these (originally) higher earnings, under Dodd-Frank's clawback provision, executives are required to return such payments to the company.

A key provision within the Dodd-Frank Act that requires the Securities and
Exchange Commission (SEC) to award whistleblowers a payment equal to 10 to 30
percent of the proceeds (recovered from corporations that violate U.S.
securities laws) based on information provided by the whistleblower.
Significantly, the SEC will not provide awards for such information unless it
produces actual monetary recoveries.

Where the SEC recovers at least $1 million, a reward to eligible whistleblowers
must be between 10 and 30 percent of the aggregate monetary penalties obtained
by the SEC and other U.S. governmental entities, in any related actions.

The SEC retains broad discretion in calculating the actual amount of the award.
The factors that are considered in arriving at the amount include the
significance of the information provided; the extent of the assistance
provided; whether the whistleblower made use of a company's internal
compliance function; whether the individual put himself/herself in danger;
whether the whistleblower encouraged others to assist the SEC; and the extent
to which the whistleblower participated in the offense.

The whistleblower provision also includes a number of so-called
anti-retaliation measures that are designed to protect employees (and others)
who report various types of corporate malfeasance.

In addition to the heightened exposures created by whistleblowers' reports
to the SEC, corporate directors and officers are also likely to face more
numerous securities class action claims as a result of the whistleblower
provision. This is because plaintiffs' attorneys are expected to
"harvest" a number of the more egregious tips provided by
whistleblowers and then use the information associated with such tips as the
basis for bringing securities class action claims.

Related Products

Your comprehensive resource for directors and officers liability exposures and coverage. Easily compare the leading insurers’ policies with detailed analyses of more than 250 D&O forms. Includes the D&O policy explorer. Learn More

Your one-stop shop for information about D&O, EPL, Professional liability, and more. The policy analyses and comparisons will help you determine which policies are best, and design the broadest coverage. Learn More

Cyber/Privacy Insurance—This report covers liability for data breaches in which a customer's personal information, such as credit card numbers, is exposed or stolen by a hacker (or other criminal) who has gained access to the firm's electronic network. Learn More

Intellectual Property and Media Liability Insurance—This report covers the following legal expenses incurred by a business: to defend against lawsuits alleging that it has infringed on a patent, trademark, or copyright; and to pay such costs when its own intellectual property has been infringed upon and must enforce its rights Learn More

Private Company Management Liability Insurance—This is a form of errors and omissions coverage for a privately-held company. It is designed to cover not only directors and officers, but also managers and employees, when they incur liability while performing their duties for the organization. Learn More

This report provides an overview of the market conditions and coverage trends related to cyber and privacy insurance for healthcare organizations. Readers will not only better understand the cyber exposures faced by healthcare organizations, but they will also be provided with incomparably detailed side-by-side comparisons of the leading insurers writing coverage for this segment. Learn More